Australian setback unlikely to spell end of Asia bourse mergers

HONG KONG (Reuters) – Stock exchanges in Asia will explore ways to consolidate as it is key to their survival, though full-blown mergers would need to be structured in a way that allays the concerns of nationalistic governments in the region, dealmakers said.

Political opposition has all but killed Singapore Exchange’s (SGXL.SI: Quote, Profile, Research) $8.0 billion bid for the Australian stock exchange ASX Ltd (ASX.AX: Quote, Profile, Research), a deal that helped spark a merger wave of global exchanges and prompted other Asian bourses to ponder the future.

Investment bankers in the financial institutions group M&A field told the Reuters Global Mergers and Acquisitions Summit in Hong Kong on Wednesday that the rise of alternative trading platforms is threatening to make traditional stock exchanges less competitive.

“The commercial rationale will continue (for consolidation),” said William Nichol, head of Asia financial institutions group for Asia Pacific at Deutsche Bank.

SGX, led by acquisitive CEO Magnus Bocker, is yet to concede defeat and has submitted written responses to Australia’s Foreign Investment Review Board regarding its planned purchase of ASX.

Yet the deal looks destined to fail, prompting industry followers to wonder if the consolidation wave has come and gone. Deutsche Bank’s Nichol thinks that if the SGX walks away, it will continue to look for targets beyond Australia. He cautioned though that regional consolidation may not live up to the hype.

“I don’t think this is a frenzy that’s going to result in every exchange in Asia coming together,” he added.

Stock exchange mergers have proved to be hard in any part of the world, primarily because several countries view them as national assets. With national sentiment and protectionism, it’s

difficult for countries to reach a common ground on exchange merger.

The solution is to structure the deals in a way to address concerns and win approval of governments and regulators.

“It’s important in many respects for these exchanges to separate the public ownership or the public entity from the actual floor or electronic exchange itself,” said Chad Holm, managing director, Asia financial institutions at Bank of America-Merrill Lynch.

“What most countries care about are the actual exchange, the vehicle that users use to buy and sell. One can ring fence that in a country and leave it effectively unencumbered from the merger…and effectuate a lot of the strategic benefits to the company,” he added.


The recent merger frenzy across the globe is driven by rising competition from alternative trading platforms such as Nomura Holdings’ (8604.T: Quote, Profile, Research) Chi-X. The exchanges face intense competition in their traditional stock-trading business from newer trading venues geared toward today’s increasingly dominant high-speed electronic traders.

Those concerns prompted SGX to launch a bid for ASX. But earlier this week the Australian government said it was inclined to reject the takeover on national interest grounds.

While M&A is the best way to go forward, bankers said given the political hurdles, exchanges can also look at other possibilities.

“This particular transaction is the merger of two national exchanges,” said Willard McLane, managing director of Morgan Stanley, which advised SGX on its bid for ASX.

“But there are many other areas where collaboration can happen, whether it’s technology, whether it’s clearing, whether it’s in derivatives, information provision, things like that. There are alternatives to consolidation that have been happening that in some cases are less politically sensitive,” he added.

But for now, SGX’s quest to form the world’s fifth-biggest stock market has hit a roadblock. And it isn’t clear whether Australia’s decision will spur similar responses from other countries in the region.

“We will have to see whether the comments made on Tuesday will be part of a trend not only in Australia, but in other countries, making these kinds of transactions more difficult to execute. It’s to early to say,” McLane added.

Some analysts have speculated that SGX could become a takeover target following Australian government’s preliminary ruling, though there are divergent views on whether Western exchanges could successfully execute takeover of Asian bourses.

“I would be amazed if the global exchanges haven’t thought of it. I don’t think it requires a massive effort in terms of joining the dots to actually come to the conclusion that Asia is an interesting market, I’m sure it’s pretty high on people’s minds,” Deutsche Bank’s Nichol added.

But such deals have greater risks due to time zone differences and a more logical move would be consolidation within Asia.

“The idea of many of the large Western exchanges coming to Asia and consolidating here is a long way out,” BofA’s Holm said.

(Reporting Elzio Barreto, Stephen Aldred and Nishant Kumar and Denny Thomas. Editing by Michael Flaherty and Muralikumar Anantharaman)

Australian setback unlikely to spell end of Asia bourse mergers